The Frontier Economic Fund (AKAF)

Geography and GDP cutoffs matter more than investors realize. The MSCI Frontier Markets Index — the mandate behind AKAF — carves out a tier of countries that are developed by measure of institutional depth and rule of law but too small or illiquid to fit into mainstream international funds. These are not the Brazils and Indias of “emerging markets.” Think: Iceland, Cyprus, Malta, Greece, New Zealand, and a handful of eastern European nations with stable governments and real GDP but populations under 10 million.

AKAF holds equity baskets in these frontier economies. The index weights countries by market capitalization, so New Zealand, Greece, and Iceland show up alongside Bahrain and other smaller developed states. The result is a portfolio of companies operating in places that rarely get a mention in the global-allocation conversation. A company listed in Reykjavik trades on the same index weight as a Johannesburg-listed firm would trade in a frontier index that includes Africa; geography and economic scale, not sector or company size, dictate positioning.

Why own this? The boring answer: geographic diversification beyond the usual suspects (US, UK, Western Europe, Japan, Australia). The real answer: inefficiency. Fewer eyes means less efficient pricing. Smaller capital pools attract less professional scrutiny. AKAF captures the value of being the only fund most investors have heard of in a given market. That is not a permanent edge, but it can be durable.

The liquidity trade-off is real. Stock exchanges in Cyprus or Iceland are not the NYSE. Bid-ask spreads are wider. Volume is thin. AKAF as an ETF smooths those frictions — it can accumulate a basket and present it as a single liquid vehicle — but the underlying securities are less liquid than US or European large-caps, which means the fund itself is less liquid than mainstream international funds. Redemptions and creation units can face friction.

The political and currency risks are also higher. A small economy’s exchange rate moves sharply on local news. Government stability, while better than true emerging markets, is still more volatile than the G7. Banking crises, inflation shocks, and even political instability can ripple through a smaller nation’s equity market faster and harder than through a diversified megacap.

Holdings tend to cluster in local blue chips: national banks, utilities, telecoms, and dominant industrial firms in each country. A Cypriot bank or an Icelandic aluminium producer might be household names locally but completely unknown to most international investors. That invisibility can work in your favour if the business is sound and trading cheap. It can work against you if bad news breaks and the crowd rushes for the exits simultaneously.

The expense ratio sits in the mid-range for international equity funds — not cheap like a broad developed-market index, but not expensive like an emerging-market specialist. Turnover is low; the index is static and only shifts when countries move in or out of the frontier category.

AKAF is not a core holding. It serves as a satellite position for investors comfortable taking on illiquidity and currency volatility in exchange for pure geographic diversification and the potential edge that comes from owning markets too small for most capital to bother following. If you already own developed markets and emerging markets broadly, AKAF fills a gap by capturing the tier between them. If you are building from scratch or have limited geographic capacity, the more mainstream options deliver similar diversification with better liquidity.